Michael Nesmith wins $47 million in video suit against PBS

Almost five years after PBS sued its former home-video distributor, the legal action
boomeranged last week, hitting the network with a $46.8 million judgment.

PBS said it was shocked by the outcome. “We’re going to take aggressive steps to
appeal this,” said Bob Ottenhoff, PBS chief operating officer. “I think the jury
didn’t understand the steps PBS had been taking all along to make this a satisfactory
venture.”

But after PBS had lost hope, the court found, the behavior of its executives crossed a
line. “The PBS people were just too blind to see that they had stepped into the dark
side,” said Nesmith’s attorney, Henry Gradstein.

PBS declined to make available its attorneys for this article.

The Feb. 1 verdict, by a federal jury in Los Angeles, largely favored Michael Nesmith
and his company, Pacific Arts Inc. A video businessman better known as a member of the
Monkees, Nesmith countersued after PBS and several producers went to court.

Nesmith will have to pay more than $1.5 million in long-overdue licensee fees to Ken
Burns and other producers–the issue that brought on the litigation in 1994. But the fees
will come out of the damages that PBS owes to Pacific Arts, the jury decided.

The jury found PBS liable for intentional misrepresentation, intentional concealment,
negligent misrepresentation and intentional interference with Pac Arts’ contractual
relations with the program producers.

PBS was ordered to pay damages of $14,625,000 and punitive damages of
$29,250,000 to Pacific Arts, plus damages of $1 million and punitive damages of $2 million
to Nesmith as an individual. The network also lost its claims of unpaid royalties on the
PBS logo.

“There’s a concept called ‘unclean hands,'” explains Gradstein. “You
can’t collect if you have blood on your hands.”

The case focuses on PBS’s behavior during a period of some days, weeks or months in
1993 when the relationship between Nesmith and PBS was souring beyond redemption.

At some point, the jury apparently believed, PBS had decided to detach from Pacific
Arts but concealed its intention while working with the company as if the relationship
would continue.

This is what Nesmith complained to the court in his countersuit. “The
Pacific Arts counterclaim alleges that by inducing Mr. Nesmith to extend his personal
guarantee and to not file for bankruptcy, and by convincing producers to terminate their
agreements with Pacific Arts, PBS committed intentional misrepresentation,” said PBS
General Counsel Greg Ferenbach, summarizing the case in a memo to stations last week.

Ottenhoff denied that PBS had mislead Nesmith about its intentions.

The turning point for the case came in 1996 after PBS and the producers asked the court
to dismiss Nesmith’s countersuit. Judge John G. Davies responded with a 44-page order,
finding in great detail that Nesmith had raised issues worthy of trial.

For observers who did not attend the four-and-a-half-week trial in Los Angeles, the
judge’s account adds substance to a chronology of the video deal gone bad.

After the honeymoon

The beginnings were auspicious. PBS and Nesmith announced their six-year label
agreement Feb. 16, 1990. PBS licensed its trademarks to Pacific Arts in exchange for
royalties of 3 to 6 percent, according to Judge Davies. Nesmith, who shared in his
family’s Liquid Paper fortune, personally guaranteed Pac Arts’ obligations to PBS for
three years. PBS was to encourage producers to sign video deals with Pac Arts. In October,
PBS Home Video launched its familiar line of cassettes in silver-top boxes.

Smaller video distributors complained that PBS was competing unfairly and ruining the
market by pricing documentary cassettes below $20, instead of the prevailing $60-100, but
low pricing came to dominate. In little more than a year, PBS Home Video had sold
cassettes with a retail value of $30 million, three times PBS’s expectation, and this was
before the major kick from The Civil War.

Pac Arts and PBS had hit a gusher of nice size. “But he had spent so much building
the oil well, he didn’t have enough to operate it,” said Gradstein. Pac Arts said it
released 143 titles in three years of operation. Nesmith and PBS later would blame each
other for trying to grow too fast.

By late 1991, Pac Arts was falling behind in paying license fees to producers. Both
sides said they realized the finances weren’t working.

On the surface, PBS still spoke hopefully. In January 1992, after visiting
Nesmith in California, Eric Sass wrote to him that PBS Home Video was succeeding
“beyond anyone’s wildest dreams” and complimented Nesmith’s long-term plans.
“This past week with your staff has reaffirmed how right our decision was to place
the PBS Home Video line with Pacific Arts,” Sass wrote.

Late in the year, Pac Arts halted payments to producers, saying it was short on
capital. At first, PBS asked producers to be patient, but in February 1993 it notified Pac
Arts that it was in default on rights payments to PBS. Nesmith said he began thinking
about an “orderly wind-down” of the PBS Home Video business, getting out with
minimal losses by selling off the rights and inventory.

In a letter of Feb. 12, 1993, Sass assured Nesmith that PBS “shares your desire to
avoid a cataclysmic disruption of distribution under the PBS Home Video label.”

“Therefore, in the event that PBS should elect to teminate the agreement … we
would support some prudent and flexible approach to properly winding down
activities,” Sass wrote, adding: “The only exception might be circumstances that
require more immediate action, for example quality control of the PBS logo or Home Video
label (which has not been and we would not expect will be a problem).”

Six years later, the court gave great weight to that Feb. 12 letter, finding PBS liable
for breaching its assurances as well as those of its original 1990 pact with Pacific Arts.
PBS also breached the “covenant of good faith and fair dealing” implied by those
documents, the court found.

In the spring of 1993, PBS again demanded immediate payment of overdue licensee fees,
and producers did the same. PBS consulted bankruptcy attorneys.

“Everybody at PBS got freaked that Chapter 11 would be a disaster,” said
Gradstein. The PBS Board formed an oversight committee. “Terminating the contract
with Pacific Arts is a poor option,” reported the PBS Board minutes in April 1993,
“because to do so would put Pacific Arts into bankruptcy and many public television
home video titles and rights would be subjected to the bankruptcy process.”

PBS asked consultant Jeff Ivers to quietly check the status of Pac Arts’ producer deals
in the company’s files, Gradstein said. In July, Ivers reported to PBS on how Pac Arts’
various producer deals could be terminated, according Judge Davies’ account.

The network knew it might find a richer partner than Pac Arts. In July, according to
Davies’ account, a PBS memo reported that Ted Turner’s company might be interested in PBS
Home Video if the Pac Arts deal fell through.

“By the fall of 1993, it became clear to PBS that Mr. Nesmith had no intention of
putting additional funds into Pacific Arts or making a meaningful effort to work with
PBS,” said Ferenbach in his memo last week.

The October coup

Nesmith pushed for a new arrangement; PBS put forth possible rescue deals. In one, it
would buy out Pac Arts’ program rights. Sass told Pac Arts Oct. 7 that PBS still hoped to
work out an agreement, he testified, but PBS had already decided that same day to pull out
of the deal with Pac Arts.

The next day, PBS consultant Ivers met with Nesmith and assured him that PBS was
negotiating in good faith, and Nesmith in turn said PBS need not worry that he’d file for
bankruptcy, according to Judge Davies’ account. Judge Davies later pointed to Sass’s and
Ivers’ assurances in his 1996 ruling that the Pac Arts countersuit should get a trial.

Gradstein recalled pressing the point in court: “We would ask PBS witnesses, ‘Why
didn’t you tell the truth to him?’ The response from Sass and [Chief Financial Officer
Beth] Wolfe was that it would have been stupid to do so.”

“We decided to terminate the license agreement reluctantly, but it was our right
to do so,” Ottenhoff explained last week. Pac Arts had repeatedly failed to pay fees
due to PBS and the producers. “What happened was that PBS terminated its arrangement
with Pacific Arts and notified the producers of that, which was only fair, since it was at
our urging that they became associated with Pacific Arts,” Ottenhoff explains.

The same day when Ivers met with Pac Arts in Los Angeles, Oct. 8, PBS lawyers in
Virginia were divvying up a list of producers to phone. A script with talking points said
PBS was waiting to divorce itself from Pac Arts on Oct. 11–Columbus Day, when federal
courts would be closed–“to give all producers an opportunity to do the same” on
a day when Pac Arts couldn’t file for bankruptcy. When Monday came, PBS and 10 documentary
rightsholders pulled the plug; more than 20 had done so by the end of the week.

Pac Arts never filed for bankruptcy, but it reportedly did collapse with the loss of
the program rights.

“After the destruction of Mr. Nesmith’s business, he went away to lick his
wounds–he moved to Santa Fe to write a novel,” recalls Gradstein. [The novel became The
Long Sandy Hair of Neftoon Zamora, St. Martin’s Press, November 1998.]

In April 1994, PBS announced a new distributor for PBS Home Video–Turner Home
Entertainment, later absorbed by Warner Home Video. PBS Home Video has prospered with
Warner. Ottenhoff said the home-video operation now has gross sales of more than $27
million a year.

A day after the Turner announcement, WGBH and WNET started the long legal battle, suing
to recoup Pac Arts’ unpaid license fees. They were followed by two Ken Burns production
companies, and by Children’s Television Workshop and PBS.

In 1995, Nesmith came back with a counterclaim, the suits were consolidated, and in
1996, Judge Davies denied the pubcasters’ request to throw out Nesmith’s counterclaim.

After long delays, lawyers for PBS and Nesmith agreed that the dispute was languishing
on Davies’ docket, with its heavy load of criminal cases, and they succeeded in getting it
reassigned. The case was concluded under Magistrate Judge Brian Q. Robbins.

Under last week’s verdict, the Pac Arts license fees will finally be paid–$1,178,487
to American Documentaries, the Civil War rightsholder; $200,000 to WGBH for Masterpiece
Theatre and Mystery!; about $30,000 to WGBH for “Geronimo”; and
$150,000 to WNET for Nature.

Within days, PBS will file further motions before the judge. PBS will ask him to stay
the judgment pending appeal, Ferenbach predicted. It may also ask for a new trial or lower
damages, according to Gradstein. PBS may also appeal to a higher court.

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